Market Interpretations

The game model results can be used for market insights by government regulators and industry experts to aid in the development of a more profitable and reputable market. This section discusses the game model results and how they may be used to aid decisions regarding the maximisation of consumer value and market value.

5.2.1. Maximising Consumer Value

Maximisation of consumer value was not the research question being optimised in the game model presented here. In this section we will hold off initially on discussing the game model results directly and discuss the market findings on consumer value in product innovation and regulation. These topics will also aid in further understanding the market maximisation results to be discussed in the next section.

The case study revealed very interesting findings that relate to the consumer value and the game model results, that would be considered valuable to the company and their product and operational decisions.

Consumer advocacy is important in any industry including motor insurance. Product innovation can increase the value of the insurance product to the consumer with little, or no, added cost to them. Additionally, regulation and policy set up by independent government bodies are designed to protect the consumer from exploitation (Barker, 2012).

5.2.1.1.

Product Innovation

Product innovation that is customer centric can make the customer’s process and relationship with the insurer easier. Easier process is also thought to increase the reliability and consistency of claims

(Littlewood, 1978; Pattman, 2015).

Innovations that increase customer value differentiate a company and their service/product; however, the heavy weight to price as a purchase innovation in this market is slow. Price competitions keeps profits low and with continuous fear of regulation on new products, new development is low. Stimulating innovations that maximise consumer value would benefit not only the consumer and the companies in the insurance industry but the market as a whole. The total market value increases as innovation and product portfolio diversity increase, therefore new insurance add-ons and other consumer centric products increase market value.

Although not related in the game theory model, back office innovation is also beneficial to the consumer, company and market. With effectively designed back office reporting and technology, company overhead can be decreased allowing for lower prices or higher profits. The reporting systems can also be designed to aid in the consumer purchase process to reduce risk of miss-selling issues and fines or litigation. Finally, if the back office innovations provide for a better consumer experience, the overall reputation of the market may increase.

Further research is necessary to understand which innovative add-ons and how innovations beyond add-ons would maximise consumer value. The game model presented here is that of maximisation of the market value in terms of profits. The problem of consumer value rather than profits is a very interesting and inherently different game that if simulated could add valuable insights to regulator decisions.

5.2.1.2.

Regulation and Policy

As of June 2011, the motor insurance product is a requirement for the ownership and operation of a motor vehicle (BIBA, 2010), and for most individuals the use of a motor vehicle is required for work or personal reasons (Office for National Statistics, 2013). These requirements could allow for exploitation of the market value. For this reason, government regulators are in place to ensure there is healthy competition and to serve the greater good, not just company profits.

The increased regulations also have grave implications for the motor insurance market. Continued regulation and threats of fines and litigation have stifled innovation in new product development (Barker, 2012). This reduces the overall value of the motor insurance market and the unique added value

products available to customers. Regulators should be aware of maintaining a balance so as to not damage the market development.

Unique added value products sold as add-ons are valuable to some customers; however, with promise of profits, a hard sell can mean consumers are purchasing these products when for them it is false value. Government regulators are the key to protecting the consumer against false value and ensuring

communications between the consumer and the company mean that consumers know and understand the product they are purchasing (Leftly, 2012). Unlike physical consumer products, services are less easily defined and the risk of misrepresentation or misunderstanding can cause great friction and cost to both parties.

Although not revealed from the game model simulation, from case study readings it is our opinion that policy makers should revise their strategy in handling new product innovation in the motor insurance industry. The current process of “cracking down” on miss-selling after an accumulation of complaints of the product in place has grave implications on company costs and reputation. Instead a managed process for the review of new products prior to release, that may include consumer feedback, would cut down on the cost to the companies, and government regulators.

5.2.2. Maximising Market Value

The game model included in our research, as mentioned before, was designed to optimise the individual company profits. At each strategy cross-point there is an estimated market value. The Nash Equilibrium point was not the point of maximum market potential. It is, however, important to ensure a strong market value to reduce the number of companies and competition being lost along with jobs, and keep economic contributions up.

This section will review the product innovation, market and comparison site implications as interpreted from the game model and other research included here.

5.2.2.1.

Product Innovation

Product innovation is valuable by aiding increased market value and market competition. To stimulate product innovation in the market, funding, regulatory cooperation and consumer desire will be required.

Preventing degradation of innovation due to regulation and litigation, is the first goal in market innovation. Current problem products need to be re-worked, with the help of government regulators to meet the needs of the market and consumer. Then modifying the relationship and communication channels between the government regulators and companies will allow innovation to thrive while ensuring the products are beneficial to customers.

In the current market, companies are barely making a profit, therefore funds are not going back into innovation and Research & Development. Initiatives by the government regulators to work with the companies by communicating prior to innovation and providing advice and funding would be beneficial to all parties.

Communication to the consumer regarding innovation is not strong, as is evident from the lack of knowledge and understanding of the telematics technology and other add-on products (Newsdesk, 2015). Further marketing and communications to the consumer that provide more valuable and informative information would boost consumer interest in the products and their value. This added interest would then act as a market “pull” (Porter, 1979) to innovation in the market.

5.2.2.2.

Market Potential

The maximum market potential is the maximum profit value for the market as a whole. It is not necessarily the Nash Equilibrium point, for this is the point where each company maximises there individual profit with relation to each other. And in this case, the Nash Equilibrium is indeed not the potential market maximum. Dependent on the government regulator goals, it may be desired that the Nash Equilibrium of the market game bring forth a greater market potential, closer to that of the maximum market potential. The regulators would need to, therefore, modify the market dynamics to create a market that fosters this type of potential.

The maximum market potential shows a balance of large companies with large and expensive portfolios and small niche companies with targeted niche insurance products. This market mix is closer to the current view of the market and may demonstrate a mid-point product mix as the market moves towards equilibrium. Further research and dynamic game modelling would be necessary to validate this point. More research is needed, but the current market position may also be a conditionally dominated strategy in this dynamic market game. The model developed was not a sequential dynamic game due to the complexity and speed of market changes.

Based on the case study research, some qualitative reasons for this market dynamic became apparent (Blackwell, 2011). As new insurers enter the market, the easiest way to gain market share is to target a niche market with a targeted product and marketing message. Entrants do not start at equilibrium due to

expense, and therefore place the market as a whole on a point outside of the market equilibrium. As the new companies grow in size and their ability to manage and understand market risk, their product portfolio expands towards the market equilibrium. With the use of strong marketing, differentiation, under pricing and other marketing methods, the larger companies are keeping an edge in this competitive market, slowing the shift to market equilibrium. This produces the current market condition as described earlier.

The market dynamic has been greatly impacted by insurance comparison websites. These market places have changed the visibility of the product features and prices allowing consumers to make a more informed decisions, driving down product prices. This change has made the insurance market behave more like a differentiated “commodity” market (McDonald & Wren, 2012). This dynamic change may accelerate the market shift to equilibrium; however, there are market outliers that do not participate in the comparison website market. These companies are continuing to thrive and further research is needed to analyse how these companies effect the dynamic of the insurance market as a whole.

5.2.3. Market Conclusions

Ensuring positive consumer value adds value to the market as well as to the consumer. The reputation of the industry plays an important role in the consumer relationship (Blackman, 2012) and a positive relationship increases customer utility.

The government regulators and market leaders will determine where the benefit balance will lie, between maximising market potential and maximising consumer value. It is assumed that the ideal situation would be a market design that contains a Nash Equilibrium that maximises both.

According to our findings, Government regulators and market leaders will need to work together to move the market forward to enable the maximisation of the market and the consumer value. In this relationship, communication must remain open to enable innovation rather than stifling it with regulation and litigation.

The current state of the market is not that of the Nash Equilibrium. This means the market is not at equilibrium of a static game and the market may still be adjusting or learning (Goldberg, 2014), or the market is on the equilibrium path in a dynamic game (Meza & Webb, 2001). Further research is required to better understand the current state of the market versus the Nash Equilibrium and the sub-game stages it may undertake as it reaches market equilibrium.